By Harold Dupuy, FGA
We’re in the midst of strange times. First, the final numbers for 2019 are in and they show that last year was one of two seasons. After strong 2018 growth of 7.6 percent, the first half of 2019 resulted in poor jewelry store sector performance with sales of -4.6 percent (-$689 million) from H1 2018. Fortunately, things turned around in H2 with a 3.1 increase ($577 million) in comparable sales. While welcome, the turnaround fell short of providing an annual increase, with 2019 ending 0.3 percent ($112 million) below 2018’s sales volume of $33.49 billion. It’s challenging to understand the 2019 jewelry store sector results given that the vital factors of the U.S. economy were favorable, and total U.S. retail sales grew by 3.3 percent.
This year is looking to be even more challenging. Right now, we all have an intense focus on the rapid spread of the COVID-19 coronavirus and its global economic impact. With guidance from the U.S. Centers for Disease Control and Prevention, numerous industry events have been postponed or canceled, while other events later in the year are carefully monitoring the situation. And this pandemic crisis has also begun affecting several specific jewelry industry sectors.
The natural diamond segment is presently undergoing challenging times. The 2019 inventory overhang in the midstream sector was starting to work its way through the supply chain before the arrival of COVID-19 earlier in the year. With many cutting factories and sales offices either closed or operating on reduced hours, the negative effect is taking its toll, but the full impact is unknown at this time. In the second sight of 2020, De Beers Group CEO Bruce Cleaver said: “Following an improvement in demand for rough diamonds during the first sales cycle of 2020, we recognized the impact of COVID-19 coronavirus on customers who are focused on supplying the Chinese market. We’ve added targeted flexibility to enable customers to defer allocations of the relevant rough diamonds.”
The recovering trend, which began last July, came to a sudden halt with the second sight of 2020, where sales dropped by almost $200 million from the first sight.
In recent weeks the metal sector has seen turbulence as a result of the global spread of COVID-19 and the sudden drop in oil prices caused by Russian and Saudi Arabian disputes. My annual precious metals median forecast, based on Q1 data, are gold at $1,546, platinum at $948, palladium at $2,000, and silver at $18.28. These estimates were produced before the advent of the coronavirus pandemic and will require some adjustments moving forward. Already we have seen palladium soar to a high of $2,795 last month.
In the fall of 2019, the U.S. trade war negatively affected China. Now with COVID-19, China-sourced products will again feel a negative impact, with most factories closed with unknown reopening dates. Based on the U.S. imports, the reliance on China-produced goods by industry, in descending order of importance, are electronics, furniture, machinery, apparel and leather, printing, plastics and rubber, paper and wood, metals, and textiles. Historically, China’s supply of jewelry-related products to the U.S. accounted for only 8 percent of jewelry imports. In 2019, primarily due to the tariff trade war, China’s jewelry-related imports declined by a half-billion dollars, resulting in less than 7 percent of all U.S. industry-related imports.
At the time of this writing, the country is in a very cautious state. Although the overall U.S. economy’s vital signs looked good for much of the first quarter, the data is in the arrears and the next few months will show the harsh impact of the coronavirus.
Historically, past pandemics, such as SARS and H1N1, resulted in a GDP slowdown of less than 1 percent. In these former cases, the recovery period to reach pre-pandemic levels was about six months. However, the COVID-19 pandemic is radically different. Due to the massive closings of non-essential businesses, overall supply chain disruption, and soaring unemployment, the impact is expected to be much greater. The federal government has aggressively passed a $2 trillion legislative aid package to assist in economic recovery. However, the magnitude of COVID-19 is unprecedented, so the recovery time prediction is really unknown.
Despite the unparalleled past several weeks, January showed positive jewelry sales increase with the industry driving a 4.3 percent increase and the jewelry stores coming in at 11.3 percent, the biggest gain in four years. The remainder of 2020 will depend mainly on coronavirus containment and vaccine development. At present, with the recent stock market decline, many Americans are more concerned about 401Ks rather than jewelry. While this health crisis is different than past and the recovery most likely will not follow the historical precedents, everyone looks forward to a return to the normalcy in their everyday lives.
Harold Dupuy, FGA, is the vice president, strategic analysis for Stuller Inc. in Lafayette, Louisiana.